Actuarial Fiscal Note

Retirement Systems Impacted by Legislation:

Teachers Retirement System

FUND(S):

TRS 2601

Sources of Revenue:

General Fund,Other Fund local governments

Legislation creates:

Neither Program nor Fund

Actuarial Note Summary

Impact this measure will have on the liabilities and contributions associated with the retirement system(s).

    The actuary has not reviewed the restrictions in WV Statutes under 2005 Pension Reform Legislation, Section 18-7A-28e ( c ), as may be applicable to the benefits being provided in this bill.

    The bill provides for a one time voluntary election by active Teacher Defined Contribution Plan (TDC) members. Each active member may elect to remain in the TDC or to transfer into the Teachers Retirement System (TRS). Members electing to remain in TDC shall continue to receive the current 7.5% employer contribution in TDC. Members electing to transfer to TRS shall receive a 75% service credit for their years of TDC service for benefit calculation purposes in TRS. Eligibility shall include all TDC service recognized in TRS. Transferring members shall have their TDC account balances as of June 30, 2008 transferred into TRS to help fund the TRS benefits. The amount transferred shall be available as a minimum benefit to the member upon future termination or retirement. The remaining 25% service credit may be optionally purchased by the member for the full actuarial reserve of the benefit value for the service.

    The bill requires that at least 70% of eligible TDC members elect to transfer into TRS or all members will be required to remain in TDC. If 70% or more elect to transfer, those electing shall be transferred on July 1, 2008. The actuarial cost analysis was prepared assuming that the most costly members would elect to transfer, and that exactly 70% elect to transfer.

    As of July 1, 2007, transferring members would increase the TRS AAL by $655,780,000. This AAL will be funded by an estimated $563,378,000 in TDC account balance transfers. This results in new UAAL in TRS of $92,402,000. Based on level dollar amortization through FY2034, annual amortization payments of $7,790,000 would be required to fund the additional UAAL. The employer Normal Cost percentage of payroll is expected to be 4.58%, or $21,728,000 for FY2008. The total contribution requirement of $29,518,000 is 6.5% of payroll.

    The cost under TRS of 6.5% of payroll is initially lower than the current employer TDC contribution rate of 7.5%, resulting in a contribution savings the first year of $4,799,000. As transferring members retire during the period through FY2034, the total percentage of payroll required increases annually until it exceeds 7.5% in FY2027, and requires larger employer contributions than the TDC rate for FY2027 through FY2034. The net contributions over the 27 year period are some $54,357,000 less than expected TDC 7.5% employer contributions.

    Although a net contribution savings is projected, it must be noted that the actuarial costs shown are based on current actuarial assumptions, and do not reflect a risk margin for the benefit guarantee under TRS being underwritten by the employer and the State. That risk includes both adverse experience (such as salary increases and investment returns) and changing long term actuarial assumptions due to changes in future economic and demographic conditions.

Fiscal Detail of Actuarial Impact

Impact on current benefit costs, prior service benefit costs and ongoing contribution requirements following full implementation.

Impact On	Following Full Implementation
Impact On	Increase in Unfunded Actuarial Accrued Liability	Initial Impact on Annual Contribution Requirement of System(s)	Contribution Increase as a Percentage of Annual Payroll
Total Annual Costs	$92,402,000.00	$29,518,000.00	6.50 %
Normal Cost of System	N/A	$21,728,000.00	4.58 %
Past Service Liabilities	$92,402,000.00	$7,790,000.00	1.92 %
Fiscal Year Past Service Amortization Period Ends	N/A	FY2034	N/A

Explanation of above Actuarial estimates:

    The actuarial liabilities and contributions shown above reflect the impact on TRS only due to the addition of TDC members expected to elect a voluntary transfer into TRS at the 75% of TDC service credit in TRS. The remaining 25% service optional purchase is fully paid by the member and therefore does not impact the TRS employer costs.

    The amounts shown do not reflect the reduction in TDC employer contributions since these occur outside of the TRS plan. The amount of the projected TDC savings compared to the TRS costs are discussed in the Actuarial Note Summary above.

    Amounts are based on the July 1, 2007 “Cost Study of Alternative Scenarios to Allow Individual Member Elections to Transfer Participation From the West Virginia Teachers Defined Contribution Plan To the West Virginia Teachers Retirement System” prepared as a Report to the Legislature by Buck Consultants September 9, 2007. Liabilities for the 70% transferring group were prepared by Buck Consultants from the study data. Amortization of liabilities, retirement projections and contributions projections through FY2034 were prepared by the Board Actuary based upon the Buck information and previous studies.

Analysis of Impact on Public Pension Policy:

    The bill attempts to provide a legislative solution to the problems created by the legal finding that the previous merger vote that would have required TDC to be fully mergered into TRS effective July 1, 2006 was unconstitutional. A significant factor is to increase retirement benefits for members of TDC who are either at or near retirement age and who do not have sufficient TDC account balances to be able to afford to retire. The level of benefits in the bill applies the expected future TDC contributions for transferring members to fund their benefits under TRS.

    There are issues in the bill with respect to certain TDC members who are either on leave or have terminated and have not withdrawn their contributions in respect to their rights following a possible future rehire.

Fiscal Note Summary

Effect this measure will have on costs and revenues of state government.

    The actuary has not reviewed the restrictions in WV Statutes under 2005 Pension Reform Legislation, Section 18-7A-28e ( c ), as may be applicable to the benefits being provided in this bill.

    The bill provides for a one time voluntary election by active Teacher Defined Contribution Plan (TDC) members. Each active member may elect to remain in the TDC or to transfer into the Teachers Retirement System (TRS). Members electing to remain in TDC shall continue to receive the current 7.5% employer contributions in TDC. Members electing to transfer to TRS shall receive a 75% service credit for their years of TDC service for benefit calculation purposes in TRS. Eligibility shall include all TDC service recognized in TRS. Transferring members shall have their TDC account balances as of June 30, 2008 transferred into TRS to help fund the TRS benefits. The amount transferred shall be available as a minimum benefit to the member upon future termination or retirement. The remaining 25% service credit may be optionally purchased by the member for the full actuarial reserve of the benefit value for the service.

    The bill requires that at least 70% of eligible TDC members elect to transfer into TRS or all members will be required to remain in TDC. If 70% or more elect to transfer, those electing shall be transferred on July 1, 2008. The actuarial cost analysis was prepared assuming that the most costly members would elect to transfer, and that exactly 70% elected to transfer.

    As of July 1, 2007, transferring members would increase the TRS AAL by $655,780,000. This AAL will be funded by an estimated $563,378,000 in TDC account balance transfers. This results in new UAAL in TRS of $92,402,000. Based on level dollar amortization through FY2034, annual amortization payments of $7,790,000 would be required to fund the additional UAAL. The employer Normal Cost percentage of payroll is expected to be 4.58%, or $21,728,000 for FY2008. The total contribution requirement of $29,518,000 is 6.5% of payroll.

    The cost under TRS of 6.5% of payroll is initially lower than the current employer TDC contribution rate of 7.5%, resulting in a contribution savings the first year of $4,799,000. As transferring members retire during the period through FY2034, the total percentage of payroll required increases annually until it exceeds 7.5% in FY2027, and requires larger employer contributions than the TDC rate for FY2027 through FY2034. The net contributions over the 27 year period are some $54,357,000 less than expected TDC 7.5% employer contributions.

    Although a net contribution savings is projected, it must be noted that the actuarial costs shown are based on current actuarial assumptions, and do not reflect a risk margin for the benefit guarantee under TRS being underwritten by the employer and the State. That risk includes both adverse experience (such as salary increases and investment returns) and changing long term actuarial assumptions due to changes in future economic and demographic conditions.

    The contributions below show the new TRS contributions offset by the expected TDC contributions under the current TDC plan if no transfer takes place.

Fiscal Note Detail

Effect of Proposal	Fiscal Year
Effect of Proposal	2008 Increase/Decrease (use"-")	2009 Increase/Decrease (use"-")	Fiscal Year (Upon Full Implementation)
1. Estmated Total Cost	-4,799,000	-4,988,000	4,893,000
Personal Services	0	0	0
Current Expenses	-34,317,000	-34,833,000	-7,897,000
Repairs and Alterations	0	0	0
Assets	0	0	0
Other	29,518,000	29,845,000	12,790,000
2. Estimated Total Revenues	0	0	0

Explanation of above Fiscal Note estimates (include possible long-range effect):

    The actuarial liabilities and contributions shown above reflect the impact on TRS due to the addition of TDC members expected to elect a voluntary transfer into TRS at the 75% of TDC service credit in TRS. The remaining 25% service optional purchase is fully paid by the member and therefore does not impact the TRS employer costs.

    The amounts shown offset the reduction in TDC employer contributions since these would have been required to be funded by the employer or the State. The amount of the projected TDC savings compared to the TRS costs are discussed in the Actuarial Note Summary above.

    Amounts are based on the July 1, 2007 “Cost Study of Alternative Scenarios to Allow Individual Member Elections to Transfer Participation From the West Virginia Teachers Defined Contribution Plan To the West Virginia Teachers Retirement System” prepared as a Report to the Legislature by Buck Consultants September 9, 2007. Liabilities for the 70% transferring group were prepared by Buck Consultants from the study data. Amortization of liabilities, retirement projections and contributions projections through FY2034 were prepared by the Board Actuary based upon the Buck information and previous studies.

Memorandum

Person submitting Fiscal Note: Harry W. Mandel, MAAA, MSPA, EA, Board Actuary
Email Address: Harry.W.Mandel@wv.gov